Managerial Accounting Quiz: Keep Or Drop Decisions
2 questions · exam conditions
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Keep Or Drop DecisionsQuestion 1 of 2

Apex Industries operates five product lines, with Product Line D showing consistent losses. Management has gathered the following information for the annual keep-or-drop decision: Line D sales $1,200,000, variable cost ratio 65%, direct fixed costs $300,000, allocated fixed costs $180,000, and unavoidable costs $80,000 if the line is dropped. The production capacity freed by dropping Line D could be used to expand Line A, which would generate additional sales of $800,000 with a 45% contribution margin ratio. However, expanding Line A would require additional fixed costs of $150,000. What should management decide?

Keep Line D because it generates positive contribution margin of $420,000
Drop Line D because the opportunity to expand Line A provides greater benefit
Keep Line D because the net benefit of dropping is only $30,000, which is not significant
Drop Line D because it shows an operating loss that burdens overall profitability
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Managerial Accounting Quiz

Managerial Accounting Quiz: Keep Or Drop Decisions

Practice Keep Or Drop Decisions in Managerial Accounting with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

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This quiz focuses on Keep Or Drop Decisions, giving you a quick way to practice the rules, question types, and explanations that matter most for Managerial Accounting.

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Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

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Question 1

Apex Industries operates five product lines, with Product Line D showing consistent losses. Management has gathered the following information for the annual keep-or-drop decision: Line D sales $1,200,000, variable cost ratio 65%, direct fixed costs $300,000, allocated fixed costs $180,000, and unavoidable costs $80,000 if the line is dropped. The production capacity freed by dropping Line D could be used to expand Line A, which would generate additional sales of $800,000 with a 45% contribution margin ratio. However, expanding Line A would require additional fixed costs of $150,000. What should management decide?

  1. Keep Line D because it generates positive contribution margin of $420,000
  2. Drop Line D because the opportunity to expand Line A provides greater benefit (correct answer)
  3. Keep Line D because the net benefit of dropping is only $30,000, which is not significant
  4. Drop Line D because it shows an operating loss that burdens overall profitability
Explanation: Line D contribution margin = $1,200,000 × (1 - 0.65) = $420,000. Net benefit from Line D = $420,000 - $300,000 = $120,000 (allocated costs are irrelevant). If dropped, unavoidable costs = $80,000. Net cost of dropping Line D = $120,000 + $80,000 = $200,000. Line A expansion benefit = $800,000 × 0.45 - $150,000 = $360,000 - $150,000 = 210,000.SinceLineAexpansionbenefit(210,000. Since Line A expansion benefit (210,000) exceeds the cost of dropping Line D ($200,000), management should drop Line D. Net advantage = $210,000 - $200,000 = $10,000, but the primary driver is that Line A provides greater benefit. Choice A ignores the opportunity cost. Choice C miscalculates the net benefit comparison. Choice D focuses on accounting loss rather than relevant analysis.

Question 2

Harmony Manufacturing produces musical instruments in three divisions: Strings, Winds, and Percussion. The Winds Division has been underperforming, and management is considering its elimination. The division's annual results show: sales $2,800,000, variable costs $1,960,000 (70% of sales), division-specific fixed costs $650,000, and allocated corporate overhead $280,000. The Winds Division shares a factory building with Strings, paying $200,000 annually in rent allocation. If Winds is eliminated, Strings would need the entire building and would absorb the full $400,000 annual rent. Additionally, Winds Division's customer database and distribution network could be sold to a competitor for $450,000.

What is the total financial benefit or cost to Harmony Manufacturing in the first year if the Winds Division is eliminated?

  1. $290,000 benefit from eliminating losses and asset sale proceeds
  2. $190,000 cost due to lost contribution margin exceeding savings
  3. $40,000 benefit considering all relevant factors including rent shifts (correct answer)
  4. $650,000 benefit from eliminating fixed costs plus asset sale proceeds
Explanation: Lost contribution margin = $2,800,000 - $1,960,000 = $840,000. Eliminated division-specific fixed costs = $650,000. One-time asset sale proceeds = $450,000. Additional rent burden to Strings Division = 200,000.Netfirst−yearimpact:−200,000. Net first-year impact: -840,000 (lost contribution) + $650,000 (saved fixed costs) + $450,000 (asset sale) - $200,000 (rent shift) = $60,000 benefit. Allocated corporate overhead will be redistributed but doesn't affect total company costs. Choice A ignores rent reallocation. Choice B doesn't include asset sale value. Choice D ignores lost contribution margin.